Tariffs and International Relations

President Clinton and both presidents Bush embraced globalism, international cooperation and free-trade. They all seemed to share a belief that increasing trade and interaction among nations would lead to greater stability throughout the world, and, perhaps, more democratic rule. Each of these Presidents placed some faith in international organizations and the ability of these organizations to foster peace and interaction (some more than others).

President Obama seems to have a different view of the world. He does not seem as inclined as his predecessors to build relationships with allied nations. President Clinton and President Bush forged close friendships with British Prime Minister Tony Blair, inviting the Prime Minister to Camp David and conversing with him often. Obama has not seemed as interested in forming such a friendship with Gordon Brown.

No, indeed, he returned the bust of Winston Churchill that Tony Blair lent Bush and presented Prime Minister Brown with insulting gifts. Perhaps he did not intend to offend the Prime Minister, but he certainly did not go out of his way to make Brown feel welcome. Furthermore, The Washington Post's Dana Milbank says that he refused Brown the "customary honour of standing beside him in front of the two nations flags for the TV cameras." According to Milbank, Obama's reception of Brown was, "a surprisingly cool reception for an ally."

The latest sign that Obama may not value international cooperation as much as his predecessors is his move to impose tariffs on tires manufactured in China. The Economist says the following:

ALTHOUGH Barack Obama alarmed free traders last year with protectionist-sounding pronouncements on the campaign trail, such as one about the need to renegotiate NAFTA, optimists among them dismissed this as mere posturing designed to placate restive trade unions. Yet a decision by the White House to impose punitive tariffs (35% for the first year, falling by five percentage points a year, to 25% in the third year) on Chinese-made pneumatic tyres now raises serious doubts about Mr Obama's commitment to free trade.

These moves certainly mark a departure from the ideologies of Obama's predecessors, but are that necessarily a bad thing? Maybe not. International cooperation has not always worked in the way its proponents thought it would. Although it has increased trade, I am not sure it has always furthered the cause of peace. UN forces, for instance, could have prevented the Rwandan genocide. Indeed, many troops wanted to, but the organizations would not let them act. This was a spectacular failure.

Meanwhile, in spite of assurances by many neo-conservatives that bringing unstable nations into the global market place will make the world a more stable, less violent place, many nations involved in international trade and organizations continue to war amongst themselves and each other. As countries worldwide face economic struggles and Iran and North Korea pursue their weapons programs, it is hard to think that the world is stable place. Maybe, then, international cooperation isn't such a good thing. Maybe it doesn't work.

Furthermore, one can understand the attraction of tariffs as workers in the U.S. struggle to make a living and China profits for providing cheap alternatives to US produced goods. But The Economist argues that, historically, "global co-operation has been crucial amid efforts to encourage economic recovery." And, indeed, tariffs do seem to have a history of hurting the economy. The US, for instance, passed the Smoot-Hawley Act shortly after the stock market crash. The act was originally intended to protect farmers from foreign competitors, but it wasn't long before other industries wanted equal protection. The government gave in, passing a bill that created the highest tariffs America had ever imposed. This triggered retaliation from countries around the world. According to The Guardian:

It was the Smoot Hartley Act penalising imports into America which set off a worldwide round of tariff increases in 1931, making a dire economic situation even worse and creating the conditions for the Depression.

Imposing a tariff on Chinese-made tires does not, by itself, seem like a major problem. Indeed, because many Americans oppose the Chinese government for social, economic and political reasons, placing a tariff on some Chinese products even seems like a good idea. Furthermore, it does not necessarily follow that because once, imposing tariffs lead to worldwide pandemonium that every imposition of a tariff will lead to a disaster. Nevertheless, because we know that that such a thing can and has happened, we ought to tread very carefully.

Comments

[James H. Murphy]

You are dead wrong in saying that “tariffs do seem to have a history of hurting the economy.” That is not the American experience.

The real world experience of US trade protection is much more positive that the free traders want to admit. Back in 1828 one of the few things Andrew Jackson and Henry clay agreed on was that America needed protective tariffs. So they passed the “Tariff of Abomination” that was the highest tariffs we have ever had. Higher than the Smoot-Hawley tariffs of a hundred years latter. These high tariffs upset the then Vice-President John C. Calhoun who set off a Constitutional crisis by urging nullification of the tariff within South Carolina. They compromised and cut the tariff from about 62 percent to about 40 percent.

Tariffs went up and down but generally drifted lower in the following years ending at about 20 percent just before the Civil War. According to free traders a trade protected economy without foreign competition should have high prices, shoddy products, and producers should have no incentive to innovate. Society should slide into mediocrity and poverty. That was never the US experience with trade protection. Contrary to free traders, the economy was growing with higher wages, lower prices, and much innovation.

After the first few months of the Civil War Congress decided to protect industry from foreign competition in war time and passed the Morrill and War tariffs which jacked tariffs up to just under 50 percent. After the war tariffs oscillated but stayed high until the first decade of the twentieth century. Again, contrary to free traders, the economy was growing with higher wages, lower prices, and much innovation. During this time we overtook free trade Great Britain.

In the first part of the twentieth century it was thought that the way to respond to industrial monopolies was to expose them to foreign competition. Tariffs were lowered to below 20 percent. That cost jobs and was abandoned in favor of anti trust legislation. By the 1920s tariffs were back in the range of 40 percent where they were when Mr. Smoot and Mr. Hawley introduced their new tariffs that raised tariffs to just below 60 percent.

Smoot-Hawley tariffs went into effect in June 1931 but did not last long. In 1934 Roosevelt started lowering them. When the Great Depression got worse in 1937 tariffs were long back to pre Smoot-Hawley levels. Tariffs continued to decline to current low levels.

The history of US trade protection has been written by advocates of free trade and surprise, surprise protection comes out as a bad thing. That is wrong. Republicans were for trade protection before they were against it. Every Republican presidential candidate from Abraham Lincoln to Herbert Hoover was a protectionist. During that long period of trade protection, contrary to the theory of free traders, the US had higher real wages, lower prices, and more innovation than the rest of the world.

During that long period of protection the US ascended to the economic high from which it has descended during a short period of free trade. Free trade got us to where we stand today.

[Miranda]

Mr. Murphy: I greatly appreciate your analysis. I think you're right that in some cases, tariffs can do some good. But it depends on the type of tariff. Tariffs created for protectionist purposes seem to affect the economy in an adverse way. Revenue-generating tariffs on the other hand have sometimes been successful. The Morrill tariff (according to Morrill himself) was designed as a revenue-generating, rather than a protectionist tariff.

Although Jackson and Calhoun may have agreed that a tariff was necessary at the time of its implementation, the effect of the tariff seems to me to have been quite negative. The nullification crisis was, in my view, a result of the tariff. It was tremendously destabilizing and followed by an economic downturn.

As for Smoot-Hawley, I think you still have to take into consideration the fact that retaliation continued long after its enactment. These reactions were not a response to Roosevelt's lowering of tariffs. They were a response to the original act.

I do not think that free trade is responsible for today's economic troubles, but I am very interested in hearing your explanation of the matter. Thanks again for your input. I appreciate your feedback and I apologize for taking so much time to reply.